China: A Cautious and Political Covid Reopening

Published on April 21, 2022
SGH Insight
Beijing’s New Man in Hong Kong
On July 1, John Lee Ka-chiu, a stalwart partner of Beijing’s, is expected to take the reins as Chief Executive of Hong Kong.
To show Beijing’s full-throated support of John Lee as the new Chief Executive of Hong Kong, President Xi will also deliver a speech at a meeting celebrating the 25th anniversary of Hong Kong’s “return to the motherland,” and at the inaugural ceremony of the new Chief Executive of the Hong Kong SAR (Special Administrative Region of the People’s Republic of China).
Market Validation
Bloomberg 6/22/22

Chinese state media trumpeted President Xi
Jinping’s “deep affection” for Hong Kong, as speculation builds
that he’ll travel to the city for handover anniversary
celebrations on July 1.
Communist Party mouthpiece People’s Daily published a
2,000-word article Monday entitled “Hong Kong’s Development is
Always Close To My Heart,” highlighting Xi’s speeches throughout
his decade in power on the city’s progress. The article was
republished Tuesday on the front page of Beijing-controlled
local newspaper Ta Kung Pao.
Hong Kong officials are preparing to celebrate 25 years of
Chinese rule in the former British colony, at an event an
unnamed state leader is expected to attend. The South China
Morning Post reported Tuesday that the current arrangement is
for Xi to visit the city, according to an unnamed source.

In the April 12, 2022, SGH Report, “China: Challenges to Q2 Growth,” we wrote:

Beijing has…determined that the most urgent task is to continue to firmly take its “dynamic zero-Covid” strategy to effectively curb the spread of the virus as soon as possible, and tide over the current difficulties to ensure steady economic growth in Q2.

Markets have nevertheless continued to look for signs that President Xi Jinping, under economic and social pressure, may be relaxing the strict enforcement of these Covid lockdown measures, especially in Shanghai, only to be disappointed at every turn.

Here is where Beijing currently stands on the lockdowns (a term Beijing does not like to use).

The Shanghai Impact

A senior economic official concedes that the current outbreak of Covid-19, mainly in Shanghai, and the Ukraine crisis pose a serious threat to the national goal of achieving a 5.5% GDP growth rate for 2022. Premier Li Keqiang is under tremendous pressure, and in a series of recently held meetings, explicitly asked all localities and governments to ensure that the economic growth rate in Q2 does not drop below the 4.8% just reported for Q1, and to even strive for a H1 average GDP growth rate of 5.0%.

Judging from the current situation, the main economic indicators such as consumption, transportation, and foreign trade in April he believes will be even worse than in March.  Whether the country can achieve a growth of around 5.0% in Q2 will depend on how the month of May pans out in Shanghai.

If Shanghai can achieve the “dynamic zero-Covid” goal in these last ten days of April, and the transportation and industrial production chain across the country can be restored as soon as possible, then the economy could stabilize in May. Needless to say, the impact of the epidemic in Shanghai on consumption and industrial production has exceeded Beijing’s expectations.

The Politics of Cross-Border Restrictions

Regarding the lifting of cross-border restrictions, and in justification ofBeijing’s tough Covid approach, an official separately notes:

Although the outside has questioned China’s dynamic zero-Covid policy recently, we will continue to strictly [adhere to] the established “dynamic Covid clearance” [as opposed to “zero-Covid”] policy. President Xi said several times that China is a socialist country, and China must not engage in herd immunity like Western countries and [in] “coexisting with the Covid virus,” so that the old, the weak, the sick and the disabled are naturally eliminated in the pandemic. [We suspect Western officials might push back on that characterization of their Covid policies].

China will open its borders gradually and in an orderly manner depending on the epidemic situation. The first step [will be] to open the Mainland to Hong Kong and Macao. If the epidemic in Guangdong, Hong Kong, and Macao is well contained, the normalization between Hong Kong, Macao, and the Mainland would be achieved in July, that is, after the new Hong Kong Executive takes office [on July 1].

The second step is to open China’s borders with neighboring countries with well-contained Covid, especially ASEAN, Russia, Kazakhstan, and Mongolia. At least for now, we have no intention of opening our doors to all countries in the world within this year.

Most notable in both those comments is a sense of urgency that is indeed mounting to ease the lockdowns domestically and in Shanghai, while maintaining an extremely cautious and measured pace for expected cross-border openings that will be rolled out with clear political linkage and overtones. At least from one Chinese official, there appears to be no suggestion that Covid-opening decisions are being solely “driven by the science.”

Particularly notable is the expected timing of the first cross border openings, with Hong Kong and Macao, to follow right after the handover of the office of Chief Executive in Hong Kong to an ally of Beijing’s.

Beijing’s New Man in Hong Kong

On July 1, John Lee Ka-chiu, a stalwart partner of Beijing’s, is expected to take the reins as Chief Executive of Hong Kong.

To show Beijing’s full-throated support of John Lee as the new Chief Executive of Hong Kong, President Xi will also deliver a speech at a meeting celebrating the 25th anniversary of Hong Kong’s “return to the motherland,” and at the inaugural ceremony of the new Chief Executive of the Hong Kong SAR (Special Administrative Region of the People’s Republic of China).

Indeed, an official in Beijing glowingly heralds John Lee’s arrival as a re-establishment of the era of Leung Chun-ying. Familiarly known also as CY, Leung was Hong Kong’s third Chief Executive, and famously cracked down on widespread protests in 2014 and 2016.

In the words of this official:

[On July 1] Hong Kong will usher in the era of Leung Chun-ying without Leung Chun-ying…that is, Lee, like Leung, will put national security and Hong Kong’s stability first. The central government places great trust and high hopes in him.

He cites Lee’s pledged top three priorities, of which Beijing fully approves. First, and of perhaps most importance to Beijing, is passage of the “treason and sedition” Article 23 of the HK Basic Law, which outgoing Chief Executive Carrie Lam had to withdraw in face of mass protests in 2019 and 2020. Lee has promised to deliver this to Beijing’s leaders by the end of 2022.

Lee’s second priority is to ensure Hong Kong retains its status as a global financial hub, and to boost its eroding competitiveness. Third is to accelerate the construction of public and private housing to solve deep rooted housing issues in HK.

But most importantly for Beijing, this official adds:

[The] upcoming chief executive election will be a crucial one to fully implement the principle of only patriots governing Hong Kong.

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